Inside Man

Congress members accuse Timothy Geithner of coddling Wall Street. Wall Street accuses him of abetting socialism. Yet when the history books are written, Geithner will be recognized as Barack Obama’s key lieutenant in the struggle to right the economy and fix the finance system. Economically, Geithner’s plan has worked better and more cheaply than anyone could have imagined a year ago. Politically, it threatens to undermine Obama’s presidency. Is Geithner a courageous public servant doing the right thing? Or have his years as a player in global finance made him loath to change an industry that needs fundamental reform?

Last October, on the day after the Dow Jones Industrial Average climbed above 10,000 for the first time since the economy had collapsed a year before, Timothy Geithner appeared at a conference put on by The Economist, deep in Manhattan’s financial district. Geithner was then, and remains, an enormously disputed figure for his central role in shaping the government’s response to the crisis, first as president of the New York Federal Reserve Bank and now as President Obama’s Treasury secretary. In some quarters of Washington, he is viewed as a fully housebroken abettor of Wall Street, the man who, from his perch at the Fed, conspired with Henry Paulson, the previous Treasury secretary and former chairman of Goldman Sachs, to sluice trillions of taxpayers’ dollars to what were once called “the malefactors of great wealth.” In Congress, Geithner is the rare subject on which some Republicans and Democrats can manage to agree: they agree he should resign. Since Geithner’s disastrous public debut in February 2009 with a speech outlining the White House’s plan to stop the crisis—the market responded by dropping 382 points—bashing him has become the preferred means of registering one’s outrage about the economy without actually committing to a course of action.

I’d arranged on short notice to join him in New York because I’d assumed, in a spectacular misjudgment, that an audience of financiers and the validation of Dow 10,000 would cast him in a different, more triumphant light. The event took place in a moodily lit subterranean auditorium that pulsed with the kind of understated techno music one associates with designer vodkas and business-class air travel. The audience was upper-middle-class Manhattan finance: hedge-fund employees, bankers and lawyers, a smattering of business students—people who don’t sit on panels or own jets but aspire to someday. Geithner was interviewed by the magazine’s editor. Pivoting off the day’s good news, Geithner said the government had “put in place the conditions and the foundation for a resumption of growth and recovery” and emphasized, a bit more forcefully than he does in Washington, just how much money it had poured into the financial system to support that objective. It was “hugely important,” he added, and a focus of government policy, that there be no “headwinds or constraints on growth going forward.” He distilled the strategy into two words: “First, growth.”

Video: Joshua Green explains the secret of Geithner’s success

Eventually, he came to the issue of fixing the system. Asked to respond to a Treasury official’s declaration that absent meaningful reform, government intervention on behalf of banks will have worsened the problem, he readily agreed: “Absolutely correct.” He spoke for a moment about the need to constrain risk-taking in order to avoid ever again placing such an “untenable cost on the taxpayer,” and then he steered back onto friendlier terrain, reaffirming his opposition to limitations on bankers’ pay. But he’d touched a nerve. During the Q&A period that followed, the market’s rise went unhailed. Instead, Geithner fielded skeptical inquiries about reform that culminated with a middle-aged man in an expensive suit taking the microphone and insisting, in the tremulous voice of someone struggling to maintain decorum in the face of an outrageous affront, that the government reconsider its plan to regulate hedge funds.

Geithner didn’t fare any better at his next stop, an interview with Maria Bartiromo of CNBC. The network, a notorious cheerleader for the stock market, seemed a cinch to celebrate any Dow milestone. So Bartiromo’s sharp interrogation was jolting. She laced Geithner with questions about whether the Obama administration was “anti-business,” plotting to raise taxes and bullying banks to cut dividend payments, and she even suggested he might be engaging in “class warfare” against the rich. Bartiromo didn’t outright call Geithner an agent of Obama’s socialist agenda, but that was the spirit of the affair. Geithner held firm to the issue of growth, and persevered. Bad as it looked, this was a mere dusting: he’d endured worse. When the cameras stopped rolling, the pair stood up and briskly shook hands, and Geithner headed for the door. Then, suddenly, Bartiromo spun around and called out after him, in a tone that expressed something between self-justification and apology, “I know you have an impossible job!”

The antithetical reactions to Geithner—agent of socialism or lapdog of Wall Street—stem partly from how little is known about him. He lacks the fully realized public persona most government officials develop by the time they’re chosen for important Cabinet positions. He doesn’t look like a Treasury secretary. He lacks presence. He’s trim and small, practically elfin, and, at 48, young for the job (he looks even younger). He doesn’t fit the Treasury secretary’s typical profile, either, since he is neither a businessman nor an economist nor a party eminence serving out a comfortable valedictory. Geithner is something else entirely—a superstar of the bureaucracy, whose rapid rise during the 1990s came in the Treasury Department he now runs. At heart, he’s an institutionalist.

Geithner came of age in Washington just after the Cold War ended, when the country’s preoccupation with wealth and the long bull market made Treasury a nerve center of the government. It helps explain Geithner to think of him as someone whose formative experience was in figuring out how to contain the series of upheavals that swept the international financial community in the 1990s, from Japan to Mexico to Thailand to Indonesia to Russia, and threatened the boom. Toward the end of the Clinton administration, a view emerged that the government had more or less figured out how to manage the global financial system. Those at the helm won extraordinary renown. The era’s time-capsule-worthy artifact is a Time cover touting Alan Greenspan, the Federal Reserve chairman; Robert Rubin, the Treasury secretary; and Lawrence Summers, Rubin’s deputy, as “The Committee to Save the World.” Geithner was an aide de camp.

To outsiders, the Clinton Treasury doesn’t command the awe it once did. Memories of the bull market have been replaced by anger at the financial deregulation Clinton presided over, which precipitated the current crisis. Greenspan’s reputation has been ruined; Rubin’s has suffered as well, for the added sin of pushing his next employer, Citigroup, to make risky bets that nearly sank the firm. But inside the group, things look much different. Its members see themselves as an elite corps, bound by the common experience of having battled the crises of the 1990s and mostly prevailed. They share the belief that a potent combination of speed, force, and nerve—a buccaneering willingness to cast aside doubt, seize the levers of government, and apply its full power—can halt financial panics. They also believe that governments typically do too little to respond, rather than too much, and pay a steep price for it. Applying this formula is what Geithner has been doing in the biggest crisis since the Great Depression. Other Obama officials share this outlook, notably Summers, who now directs the National Economic Council. But the faith runs purest in Geithner.

From Geithner’s perspective, this approach is the surest, cheapest, and least destructive way to save an economy in danger of collapse. But it comes at a cost, which is that it is galling to the public. It requires abstaining from moral judgments and pumping tax dollars into the same institutions that inflicted the pain, as part of an all-hands-on-deck effort to restore economic confidence. This has had the politically deleterious effect on the administration, and especially on Geithner, of appearing to routinely submit to Wall Street. It’s what lies behind the public’s anger, the feeling that some fundamental injustice is being allowed to perpetuate itself—a sentiment that violently upended the Obama agenda in January, when the Massachusetts Republican Scott Brown won the special Senate election to replace Ted Kennedy. Brown’s victory immediately derailed Obama’s signature initiative, health-care reform. But his win was widely interpreted as an expression of anger at the White House for its handling of the economy, and particularly of Wall Street.

The fact that most of the bailouts driving this anger occurred under George W. Bush has been easy to overlook, in part because Geithner is the most visible constant between the two administrations. At every stage, he has been central to the crisis—during the initial response, the design of the recovery plan, and the effort to devise new rules. “During the Bush administration,” Keith Hennessey, a former director of Bush’s National Economic Council, told me, “you basically had three people who were the core in making the policy recommendations to the president and implementing them. And they were Hank Paulson, Ben Bernanke, and Tim Geithner. Now it’s Larry, Ben, and Tim, and Tim has moved chairs. What this means is that two-thirds of the core policy group is unchanged from Bush to Obama. The Obama political and communications operations have always wanted to emphasize just how different and transformative the Obama solutions are, relative to the Bush people who—they claim—left them this enormous problem. The reality is, there is remarkable continuity, from a personnel standpoint and a policy standpoint, in what’s being done.”

That reality has become a liability. Geithner designed Obama’s response to the crisis—a response that, along with the stimulus and the Federal Reserve’s actions, has been cheaper and more effective than many people predicted, though still imperfect. But this success has been obscured, partly by stubborn high unemployment but mostly by the perception that Obama has “put the interests of Wall Street above those of Main Street.” And more than anyone else, Geithner is held to blame.

But to think of Geithner only in the context of Wall Street, rather than Washington and national politics, is to miss a lot of what’s going on. Geithner’s career coincides almost exactly with an important shift in how the Democratic Party thinks about finance, a shift that set off the wave of deregulation and reoriented the institutions he served. Any study of Geithner is unavoidably a study of how both political parties came to agree that the interests of the financial sector must predominate, of what went wrong when those interests did predominate, and of how someone whose glittering career is a product of that system wound up at the center of an effort to write new rules for it. At the center, really, of the whole Obama presidency.

If Geithner were a character in a British period novel, he’d be the diligent son of the head servant, someone whose outstanding qualities are noted by the master and who, when the time comes, is unexpectedly rewarded with passage to university and the world beyond. He makes a deep impression. Almost anyone who has spent time with him can describe his effect on people. A senior Treasury official in the George H. W. Bush administration recounted for me, in vivid detail, 20 years after the fact, a single briefing that Geithner, then still in his 20s, had given him on Japan: “Within the building, Tim was already thought to be a superstar. And in my experience, he was brilliant. Incredibly well prepared, thoughtful. He still talked too fast, even then. But he was so on top of stuff, so impressive professionally, that there was a ‘wow’ factor in dealing with him. You’d hear how good he was, and then you’d deal with him, and then you’d think, ‘Oh my God, the guy really is just better.’” Geithner’s career follows a pattern of his being not necessarily the first, or the most obvious, choice for some important job, getting it anyway, and performing so well that he quickly advances, acquiring a patron in the process. He is the quintessential promising young man. And he has many powerful patrons.

Geithner was born in Brooklyn in 1961, and grew up in a series of far-flung, exotic locales. When he was 1, his father, Peter Geithner, joined the United States Agency for International Development and moved his family—his wife, Deborah, and Tim—to Salisbury, Rhodesia. Peter Geithner came from Columbian Carbon International, a Fortune 500 conglomerate, as part of a Kennedy effort to recruit businessmen into government. The Geithners’ daughter, Sarah, was born in Rhodesia, and twin sons, David and Jonathan, followed two years later, when the family was back in Washington. In 1968, Peter Geithner accepted a position with the Ford Foundation and the family moved again, to New Delhi.

The Geithners took a full-immersion approach to living abroad: Peter Geithner emphasized to me that his family’s social life in India, and later in Thailand, did not revolve around the embassy crowd or fellow foreigners, but rather locals he met through his work. To Tim Geithner, the experience was indelible. “I was living in countries with acute poverty,” he told me, in one of several recent interviews. “I saw from an early age what impact the U.S. could have on the world, for good and for not-so-good. My parents’ friends, from an early stage in life, were in that world—Oxfam, CARE, World Bank, Amnesty International.” To work as a Third World development officer is to witness the limitations of government’s capacity to solve problems on its own. Foundations like those to which his parents and their friends devoted their lives exist to offset these shortcomings. They exert influence obliquely rather than by force. Geithner followed a path very similar to his father’s—up to a point. He majored in government and Asian studies at Dartmouth, then took a graduate degree in international relations, as his father had, from the Johns Hopkins School of Advanced International Studies. His interests likewise tended toward Asia. After graduate school, his father had deferred going into government to gain private-sector experience; so did the son, landing a job in 1985 at Kissinger Associates, the consulting firm founded by Henry Kissinger, Brent Scowcroft, and Lawrence Eagleburger.

For a young man planning a career in the international side of government, this was a stroke of almost unimaginable good fortune. It did not come by chance. Scowcroft had called the dean at Johns Hopkins and asked him to recommend an Asia specialist; he recommended Geithner. Geithner was one of four analysts charged with covering the globe. He wrote memos on political and economic developments in China, Japan, and Southeast Asia, and then flew to New York to brief the firm’s high-powered principals. Kissinger took note of his young charge. Geithner was asked to write a series of longer papers, not for the firm but for Kissinger personally, and they became part of the basis for Diplomacy, Kissinger’s sweeping history of international statecraft. Although Geithner moved on to the government after three years, Kissinger remains an enthusiastic backer.

Geithner came to Treasury as a civil servant in 1988. After a year in the trade office, he moved over to the Office of the Assistant Secretary for International Affairs, which was known as OASIA (pronounced “Oh-asia”). At the time, OASIA had a reputation as a rich-in-tradition, upper-echelon bureaucracy with an experienced career staff, much like USAID. The institutional culture was proudly nonideological, eastern-establishment, consensus-driven, business-friendly, and consciously apart from the crude partisanship of Capitol Hill. Geithner was sent to Tokyo as assistant Treasury attaché in the U.S. Embassy in the spring of 1990, arriving just after the Japanese real-estate bubble burst and the Nikkei index began its dizzying fall—the beginning of Japan’s “lost decade” of deflation and stagnation. The United States’ role was that of the stern parent, urging Japan to confront the reality that its banks were paralyzed by bad loans. The Japanese government was loath to recognize the problem, preferring to wait in hopes that its banking system would heal itself. This strategy of denial necessitated lots of diplomatic feints and thrusts, and part of Geithner’s brief was keeping abreast of the recondite details and knowing their possible second- and third-order effects. For the most part, the U.S. pressure failed. But working on the problem was enlightening. “You learn much more about a country when things fall apart,” Geithner says. “When the tide recedes, you get to see all the stuff it leaves behind.”

The Japanese experience underscored the limits of moral suasion and the dangers of taking a gradualist approach to a banking crisis. It would be eight years before the Japanese government began to fortify its banks with public capital, and Japan still has not fully recovered. “These were very capable people,” Geithner told me. “They were making a completely conscious choice that they were going to take this strategy, even though it was going to be costly in terms of growth forgone.”

Geithner returned to Washington and OASIA in 1992, intending to stick around long enough to help a new boss settle in and then pursue a different job within Treasury’s civil service. The incoming undersecretary for international affairs was Lawrence Summers, the brilliant, prickly Harvard economist entering government for the first time. Geithner had never heard of Summers, but agreed to stay on temporarily as a special assistant. He never left.

The pair fast developed a symbiotic relationship. Geithner had the rare capacity to withstand Summers’s intellectual bullying and thrive, giving back as good as he got. Summers found that Geithner possessed an uncanny feel for how power functions in a bureaucracy, and could guide him in the foreign culture of the government. (Geithner’s Secret Service code name as Treasury secretary is “Fencing Master.”) His colleagues rave, as Summers did to me, about how Geithner is always armed with a plan: “Most people, when you ask, ‘What should I do about X?,’ will give you a list of considerations. Tim always gave you a strategy.” The partnership was the more striking to behold for the temperamental and physical differences between the two men: Summers, the brash, slovenly academic, and Geithner, his lithe and savvy aide.

Geithner has the schoolboy qualities of being hardworking, exact, and deeply loyal to those above and below him. But there’s something else there, too. The image of him that coalesced in the early weeks of the Obama administration—awkward, halting, out of his depth, mocked on Saturday Night Live—is precisely the opposite of the view held by those who have known him, a view that is remarkably consistent. In the course of many interviews about Geithner, two qualities came up again and again. The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment. Second was his athleticism. Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate). He inspires an adolescent awe in male colleagues.

In 1995, Geithner’s career took another propitious turn when Robert Rubin became Treasury secretary. Rubin was lured away from the co-chairmanship of Goldman Sachs by way of the National Economic Council, and brought with him a style of management that flattened Treasury’s hierarchical culture, giving more of a voice to young staffers like Geithner. By the mid-1990s, policy makers were becoming aware of the esoteric dangers that derived from the burgeoning global economy. The Mexican currency crisis that struck just as Rubin was taking over was typical in that it was a distant and unanticipated event that nonetheless imperiled American interests. An overriding concern of Treasury became defending the long boom against foreign incursions. OASIA was the laboratory for figuring out how.

As with the U.S. crisis later on, Mexico’s trouble began with irresponsible borrowing, and spiraled when investors panicked. The reason this mattered to the United States government was the probable knock-on effects of a Mexican default—what was worriedly referred to in financial circles as the “tequila effect.” A default would frighten investors into abruptly pulling out of emerging markets around the world, wrecking their economies. Since developing countries bought about 40 percent of U.S. exports, the pain would register here in the form of massive job losses, economic contraction, and a sharp rise in illegal immigration. Geithner was part of the Treasury team that put together a response on the fly. The initial plan was to rally investors by providing Mexico $25 billion in loan guarantees (later upped to $40 billion). In a now-familiar pattern, Congress sent early signals of support, then refused to fund a “bailout.” So the Clinton administration, again foreshadowing what was to come, put together $40 billion in loan guarantees from the International Monetary Fund and Treasury. This improvisation worked: the crisis subsided, and Mexico repaid its loans early, at a small profit to the U.S. government.

Mexico was the first in a series of crises that would go on to sweep Asia, beginning in 1997 when Thailand devalued the baht. Thailand, too, had financed itself on unsustainable short-term borrowing, burned through its foreign reserves, and watched helplessly as investors fled. This time, concern about “moral hazard” kept the U.S. from stepping in, and an IMF intervention failed. Malaysia, Singapore, the Philippines, and Hong Kong all came under similar pressure, and then the crisis spread to larger economies, like Indonesia and South Korea, and eventually reached Brazil and Russia. Russia’s default on its bonds brought the hedge fund Long-Term Capital Management crashing down, briefly destabilizing the U.S. economy. Geithner became a sort of bureaucratic adrenaline junkie, racing between the front lines. By the end of the Clinton era, a basic method had emerged for responding to financial crises: quickly flood the market with money to restore confidence. Buy time to work out debts by not upsetting investors. Make stringent reform a condition of rescue—shut down weak banks, bust up oligarchies, and clean up corruption. Then withdraw.

Geithner and Summers emerged as Rubin’s most trusted aides. Summers was the senior figure, of course, but there was another difference between them, which was that Geithner was career staff. Although Treasury’s civil service works closely alongside its politically appointed leadership, the two groups exist on parallel planes and inhabit distinct social classes. It is almost unprecedented to cross from one to the other. Geithner made the leap. Rubin promoted him all the way up to assistant secretary for international affairs. Then, just before Summers succeeded Rubin in 1999, Geithner rose again, to the job Summers had occupied when they met, undersecretary for international affairs.

One of the great mysteries of the Clinton years is how a team so adept at bringing financial order around the world imagined that it would be a good idea to strip away so many of the rules governing banks and investment firms here at home, rules that dated back to the New Deal. How did Washington get it so wrong?

Much of the thinking about the current crisis goes like this: the problem proceeded directly from the deregulation of the financial industry in the 1980s and ’90s, which was orchestrated by a handful of free-market academics and conservative think tanks that conspired with Wall Street to seduce Washington into going along. That’s true, but it doesn’t tell the whole story. The intellectual history of the movement to deregulate finance features radicals along with conservatives, and the process began being implemented under Jimmy Carter, not Ronald Reagan. It wouldn’t have happened without Democrats.

Throughout most of American history, banking crises were frequent, debilitating occurrences that ranked as a first-order concern in national politics. Only when the New Deal reforms of the 1930s assigned the federal government an active role in managing risk did that change. There followed a long spell with no major upheavals, and banking receded as a popular concern. The impetus for doing away with regulations that gave every appearance of being remarkably effective came from two distinct realms of the academy that would appear, at a glance, to be extremely unlikely to find accord.

In the late 1960s, conservatives in the University of Chicago’s economics department, led by George Stigler, began arguing against New Deal regulatory agencies on the grounds that the businesses they were overseeing invariably dominated them, with the result that competition was inhibited. This idea was called “regulatory capture.” It became axiomatic among Chicago School types that if regulation couldn’t function as a disinterested public good, it should be abolished.

At roughly the same time, a group of New Left historians, many at the University of Wisconsin, rejected the prevailing liberal view that the Progressive era and New Deal reforms were a landmark achievement in the public interest. What the New Deal had really done, they decided, was sanctify an economic order that favored corporate interests. Their critique went by the name “corporate liberalism.” Where conservative neoclassical economists and Marxist historians converged was in their desire to “sever the corrupting ties between industry and government,” as Eduardo Canedo, an economic historian at Princeton University, puts it.

The corporate-liberal critique might never have made its way from Marxist historiography to Washington policy had it not resonated with someone who had an unparalleled ability to take ideas from outside the mainstream and force them to the center of public debate, someone who happened to be, right then, at the very apex of his influence: Ralph Nader. In the early 1970s, Nader’s attention was shifting from social regulations like automobile safety to economic regulations. He condemned what he called “corporate socialism,” but added a twist that horrified the Marxists. As a liberal who held no brief for unions, Nader began attacking government agencies for favoring the interests of business and labor over those of consumers. (Though he dropped his attacks on labor, he continued to advocate the abolition of a host of regulatory agencies, which he wanted to replace with a single superagency.) Jimmy Carter, who positioned himself a notch to the right of New Deal liberalism, also found appeal in undoing regulations. In 1978, working with the Democratic Congress, he deregulated the airline industry. Rail, trucking, and natural gas followed. It was Carter who struck the first big blow against banking rules, by signing the Depository Institutions Deregulation and Monetary Control Act of 1980, which loosened interest-rate limits and allowed more bank mergers, and he gave every sign that he would have kept going had he been able to.

Reagan’s victory ought to have hastened what Carter had begun—but it didn’t. Canedo, who studies the history of deregulation, has a persuasive theory about why: opposition from the Democratic Congress. “Reagan wanted to undo not just economic regulation,” he says, “but social regulation—environmental and workplace safety rules—and was so flagrant with some of his appointees, and the lack of enforcement, that he bred a backlash. It was too ideological.” Democrats recoiled. But liberal antipathy toward Reagan did not abolish the impulse to deregulate; it simply held it in check. “The intellectual orientation of the mainstream of the Democratic Party in the Reagan years was much closer to Wall Street than anyone admits today,” Canedo says. When Bill Clinton was elected, pent-up Democratic desire, gladly facilitated by the new Republican leadership in Congress in 1995, unleashed the wave of deregulation that culminated in 1999 with the repeal of the Glass-Steagall Act, the seminal New Deal banking reform.

The financial industry was anything but a bystander. Its size relative to other sectors of the economy exploded, increasing its Washington heft. The assets of securities brokers and dealers, for instance, which represented less than 2 percent of gross domestic product in 1980, grew to 22 percent in 2007. In the mid-1980s, the Democratic Party began soliciting from Wall Street in earnest, and contributions climbed steadily from then on. In the 2006 election cycle, Democrats got more money from financial interests than Republicans did—an amazing development given the party’s historic disposition toward Wall Street, and a significant factor in its takeover of Congress and the White House soon after.

Critics today focus overwhelmingly on this money as the driver of Democratic behavior, a tendency that conforms a bit too easily to stereotype—it isn’t wrong, but it assigns all the blame to a sleazy quid pro quo when a lot more was happening. One factor was that George Stigler’s idea about regulatory capture was widely accepted. Another was that the thrust of what emerged from the academy argued strongly for placing faith in financial markets. Government failure, not market failure, became the big source of concern. “Traditionally,” David Moss, a historian of risk management at Harvard Business School, told me, “the notion that risk could be left entirely to the private market to manage was often greeted with a certain amount of skepticism by lawmakers. The regulatory philosophy of the last three decades—that the government should step aside, almost completely—was really guided more by theory than by historical experience.”

Politicians don’t get much credit for being thoughtful, but they do respond to new ideas. Most of the new ideas said regulation was unnecessary. The Brookings Institution and the American Enterprise Institute, respectively the premier think tanks of the left and the right, were compatible enough in outlook to establish a Joint Center for Regulatory Studies in 1998. (It shut down in 2008, during the crisis.) Wall Street money alone didn’t convince Democrats they were on the virtuous path. The financial, intellectual, and political indicators were all pointing in the same direction: toward deregulation. This consensus narrowed the parameters of respectable debate to the point that criticizing Wall Street came to be considered unsophisticated.

A former Democratic Senate staffer explained the effect this way: “Before the 2008 crisis, [the Banking Committee] was seen as a place where you could go, serve a couple years, and end up going to lobby. Everyone thought that financial services was the perfect industry, where you had a harmonization of progressive values with money. It was a way to be a good Democrat and a good liberal while making lots of money. The mark-to-market accounting changes, the loosening of bank capital requirements, harmonizing international standards—all that stuff was seen as, like, ‘Where’s the harm in this?’ If banks are making a little more money to keep up with their international competitors, what’s the big deal?”

Geithner arrived at the New York Federal Reserve Bank in 2003, after a stint at the International Monetary Fund, which means he arrived at the epicenter of finance just as Wall Street was roaring into its unbridled latter-stage boom. He was an unusual hire. The New York Fed embodies everything connoted by the phrase “clubby Wall Street institution.” It is the most powerful of the 12 regional banks composing the Federal Reserve system, intended to function as the Fed’s outpost on Wall Street. But its shares are owned by the same financial institutions it oversees. Its president is chosen by (and reports to) a board of directors typically drawn from top executives of these firms.

The presidency of the New York Fed is a job insiders give to one of their own. Geithner wasn’t a Wall Street insider. But he knew somebody who was, and that somebody had the ear of Pete Peterson, the New York Fed’s chairman of the board, who was searching for a new president. “Pete asked me if I had any thoughts,” Rubin told me, “and I said, ‘Yeah, I have a heck of an idea: Tim Geithner.’” Peterson arranged a meeting and came away impressed, although he confided to Rubin, “He looks very young.”

Geithner won over his new constituents with characteristic diligence, arranging a series of personal meetings with CEOs. Once he’d settled in, Geithner chose to focus on derivatives, delivering over the next few years a series of prescient speeches about their risks. This class of abstruse, largely unregulated financial instruments, including credit-default swaps, grew enormously in the run-up to the crisis; panic over whether institutions like AIG and Lehman Brothers would honor their derivatives contracts helped trigger the collapse. As early as 2004, Geithner was warning of “fat tails,” a term that suggests that catastrophic events at the far end of a bell curve are more likely to occur than statistical models imply. I told him that it sounded as though he had been predicting the crisis. He nodded. “I felt like my entire time in New York,” he said, “there was a fear that this was going to end badly.”

Others, too, were alarmed at the growth of derivatives trading, most notably Brooksley Born, the head of the Commodity Futures Trading Commission during Clinton’s second term. In 1998, Born’s determination to issue a paper warning of the dangers of derivatives had precipitated a small Washington scandal when Alan Greenspan and senior Treasury officials, strenuously opposed to regulating derivatives, tried to talk her out of it. Summers is reputed to have called Born to say: “I have 13 bankers in my office and they say if you go forward with this, you will cause the worst financial crisis since World War II.” She issued the paper, and nothing happened. Last year, Born received a Profile in Courage Award from the John F. Kennedy Library Foundation.

Geithner took a different approach. As derivatives trading took off, the technical infrastructure underlying it remained worryingly primitive. Banks still confirmed deals by fax. Buried in the backlog of paperwork, trades took weeks to clear. As long as everything went well, this was mostly a matter of housekeeping. But were crisis to strike, the unsettled trades could cause chaos and freeze the market, to potentially devastating effect. Geithner spent two years building consensus among the banks to update the system, which they finally did. When Lehman failed, its hundreds of billions in derivatives contracts were settled within 72 hours, sparing untold amounts of anxiety and money (a panic would have driven down the market even further). Geithner’s actions were shrewd, but also disconcerting, since they addressed the problem only insofar as met the banks’ self-interest. He took no drastic steps to warn the public.

Why didn’t he? “I don’t believe in the Chicken Little stuff,” he conceded when I asked him. “It wasn’t my place, and I tried to focus on changing the things that I could affect.”

On Wall Street, Geithner fit in easily and impressed everybody—so much so that in 2007 he was approached about becoming CEO of Citigroup, even though his private-sector experience was limited to Kissinger Associates. Friends ascribe to him an almost Victorian sense of duty, and the fact that he’d spent most of his working life in government was indeed unusual, not just on Wall Street but in Washington. Even those Republicans for whom government is the primary object of ambition usually leave at some point for a stint in the private sector, because it’s considered suspicious to spend a career serving an entity to which one is supposed to be philosophically opposed. Most Democrats also leave for the private sector, though for a different reason—money. Geithner hasn’t, yet.

When the crisis broke, Geithner was instrumental in the government’s rescue of Bear Stearns; its decision not to rescue Lehman Brothers; and its bailouts of AIG, Citigroup, and Bank of America. Whether or not these were the right responses will be debated for years; what’s not disputed is that Geithner, Ben Bernanke, and Henry Paulson were the chief actors in deciding how the government handled the biggest panic since the Great Depression. Public-opinion polls indicate overwhelming disapproval of their actions, but many insiders defend them. “Markets are funny animals,” Rubin told me. “Tim, through his work on the Asian financial crisis, got a lot of exposure to market psychology and how markets work, and developed a feel for it. Very few people who have not worked in the markets develop a feel for what they’re like, but Tim did. It could have been an absolute disaster if someone had been in the job who didn’t have his experience.”

The official story of Geithner’s selection as Treasury secretary is that he was one of three serious candidates, along with Summers and former Federal Reserve Chairman Paul Volcker. The background story is that it was always between Geithner and Summers, Volcker’s inclusion being both courtesy to a legend and a political maneuver to reflect gravitas onto Obama. Summers wanted the job, and looked to be the favorite. (He also had his eye on the Fed chairmanship.) A confirmation hearing would have brought controversy—his rocky tenure as president of Harvard, his hedge-fund job—but probably not enough to sink him in the middle of an economic free fall. Obama hardly knew Geithner. While Summers ran the campaign’s daily economic briefings, Geithner was in New York attending to the crisis. By the accounts I heard, Obama chose Geithner largely on the strength of a single 65-minute interview on November 16.

One can imagine the realization dawning upon Obama that here was the man he needed. Someone who understood the crisis in all its terrifying detail, and could explain it succinctly. Someone who proposed a course of action (“Plan beats no plan,” Geithner liked to say), and whose habit it was when speaking frankly to interpolate blunt profanities, so you’d get right away that this wasn’t some uptight staffer but rather someone you could see working with—someone who was even a little ballsy. Obama would already have heard from the right people that he was loyal, disinclined to drama, accustomed to subordinating his ego to a principal’s. Everything—his international background, his athleticism, his appearing to lack the kind of baggage that could imperil a nomination—would argue for his choice. To top it off, putting him at Treasury would greatly reassure the market. Was it even close?

But things got off to a terrible start. Geithner’s nomination was leaked on November 21 and followed by the only serious professional setback he had ever experienced. His confirmation was jeopardized by the discovery that he had failed to pay $34,000 in taxes during the years after the Clinton administration when he worked at the International Monetary Fund—an error that he himself had committed while using TurboTax. A few weeks later, Tom Daschle, the former Senate majority leader nominated as secretary of Health and Human Services and intended to be the point man on health-care reform, also encountered tax troubles. “With the tax troubles it kind of became clear that with Daschle’s and Geithner’s nominations moving simultaneously, one of them probably wouldn’t make it,” a veteran Democrat who worked on the transition told me. In the end, Geithner was confirmed by the narrowest margin of any member of the new Cabinet. Daschle withdrew, bitterly disappointing staffers, who perceived Geithner as an undeserving newcomer and, furthermore, ungrateful to those who had scrambled to save him. “When Daschle’s nomination failed and Geithner’s succeeded,” the staffer says, “the line you often heard was, ‘We did exactly what the government did. We saved Bear Stearns and let Lehman fail—in other words, we saved the wrong one.’”

Then there was his awkward new situation. He was back battling a crisis alongside Larry Summers, but no longer the junior figure. Now they were equals; and Geithner, by virtue of having bested his old mentor for the Treasury job, could even be perceived as slightly the senior. Summers, say many who know him, had difficulty adjusting. “Larry is not, by nature, built to make that easier,” says a friend. As Obama was preparing to take office, the economy was shrinking at an annual rate of 6.4 percent. One of the most significant failures of Obama’s presidency is that he hasn’t been able to win more credit for how quickly he turned this around. Right away his team devised a strategy that drew on the lessons of the 1990s, but rested upon a novel feature that was essentially a gamble designed to save taxpayers trillions of dollars—a gamble that has so far paid off. And yet, today, just about everybody thinks Obama took a frantic and costly ad hoc approach to the crisis, of which the best that might be said is that he meant well.

The belief that shaped the administration’s response was that governments always move too slowly. “I’d watched the emerging-market crises,” Geithner told me. “The simplest way to say it is that you have to move quickly with overwhelming force. You’ll be able to get out more quickly if you do. You’ll solve the problem more cheaply—less cost to the economy, less unemployment, less business failure, less cost to the taxpayer. People do the gradualist approach for two reasons. One is, the politics are terrible, because nobody wants to have to take that consequential act of putting a lot of money behind a financial system and helping a bunch of people that caused the crisis. The other reason is that people tend to hope it will get better, hope they’re overestimating the problem, hope it’ll heal itself, and that causes them to wait. But ultimately it takes capital in the financial system, and it takes the fiscal cannons of the government to work.”

Geithner thought the best plan would align three cannons. The first was monetary policy: the Federal Reserve would lower borrowing costs to nearly nothing. The second was fiscal policy, through which massive government outlays—a stimulus—would help fill the gap in private spending. The third was the recapitalization of the financial sector, which meant getting money into banks to help them absorb losses and continue lending. Upping the degree of difficulty was the need to coordinate with other countries, since the crisis was already global. (This happened at the G-20 meeting in March 2009.)

All of this was textbook crisis response. The daring break from form—really, the plan’s defining feature—lay in where the bulk of the money would come from. History said the answer was government. But there was, theoretically, another option. “The distinction in strategy that we adopted when we came in,” Geithner says, “was to try and maximize the chance that capital needs could be met privately, not publicly”—that investors, rather than taxpayers, could supply the money banks needed. If the plan worked, it could save taxpayers a great deal. Research by the Cleveland Fed into financial crises estimates the typical cost at 5 to 10 percent of GDP, which would leave taxpayers on the hook for somewhere between $700 billion and $1.5 trillion—and presumably more, given the depth of this crisis. (A recent IMF study put the average cost of a crisis even higher, at 13 percent of GDP, or $1.9 trillion.) The danger, if the plan failed, was that the crisis—and the cost—would escalate, and that the government’s credibility would be shot. It’s a barometer of how uneasy some administration officials were about the plan that they referred to it in the press as the Geithner Plan. If it failed, there’d be no doubting who would get the blame.

The first challenge was to persuade panicked investors, amid what amounted to a run on every bank, to buy shares in any of them. The infamous “stress tests” were designed to accomplish this. The idea came from Geithner, whose stress-testing at the New York Fed had informed his warnings about derivatives and fat tails. In essence, stress-testing is a risk-management tool that measures the probability of future outcomes, including worst-case scenarios. When Obama took over, the markets were frozen because investors, uncertain of how bad the crisis could get, assumed the worst.

Geithner says he settled on stress tests as the centerpiece of the economic response in December, while sitting on a beach in Mexico. The plan was to force banks to submit to an appraisal of how they’d fare if conditions worsened, and then make a judgment about how much additional capital they’d need. They’d have a chance to raise that money privately. But if they couldn’t, the government would supply it—with all the strings that implied. The gambit was that injecting this new measure of uncertainty would ultimately be helpful. Good results would halt the panic and might lure back investors; bad ones would at least clarify the severity of the crisis. “The basic strategy,” Geithner says, “was to dispel the cloud of uncertainty.” Initially, that didn’t happen. Many people assumed the tests were a pretext for allowing the government to seize weak banks. Others complained that the tests were too mild, and suspected that the whole thing was an excuse to let banks try to grow their way out of trouble—to reprise what Japan did.

To just about everybody’s surprise, though, the plan has appeared to work. The Dow bottomed out last March. But this brought further challenges. The reason that many White House officials viewed the Geithner Plan with asperity was not only because it might fail but also because seeing it through to success could be poisonous. Any strategy that depends on the private sector’s willingness to invest amid chaos must tread cautiously in the market or risk scaring off the very people it seeks to attract. The charge that the White House has coddled Wall Street isn’t just true—it was key to the whole endeavor! The major struggle within the White House last year is often mistakenly assumed to have been over whether (and how) to nationalize ailing banks. But no plan besides Geithner’s was seriously put forward—and the difficulty of seeing that plan through was the basis of the struggle that played out across Obama’s first year.

Geithner’s plan was wildly out of sync with the public desire for swift, retributive justice against the banks. Geithner strenuously opposed this way of thinking, which often put him at odds with others in the administration, including Summers. The big debate among economists and members of Congress when Obama took office was whether to nationalize the weakest banks. Elite opinion was drifting toward the view that this was an unpleasant but necessary step. Geithner countered that it would be premature, grossly expensive, and, by putting the government in charge of banks, unlikely to succeed. “We’d have had 18 AIGs on our hands!” Lee Sachs, one of his top aides, exclaimed to me. Summers, though he claims never to have advocated nationalization, was more hawkish about wanting to impose the government’s will, particularly on Bank of America and Citigroup, recipients of billions of dollars of support. But even this spooked Geithner, who feared that even measures short of nationalization would send investors fleeing.

Geithner became phobic about intervening in the markets in any way that investors could perceive negatively, fighting off White House efforts to impose stringent pay caps on banks receiving federal aid. When Britain’s prime minister, Gordon Brown, advocated a tax on financial transactions to reduce the appeal of purely speculative trading (an idea Summers once favored), Geithner publicly dismissed the notion out of hand. He has exasperated the bailout program’s chief watchdog, Neil Barofsky, by refusing to make all of the banks explain how they use their bailout money. “It’s hard to be on the wrong side of this issue,” Barofsky marveled when I asked him about it. “This is just basic accountability.” Barofsky has become Geithner’s chief tormentor.

According to insiders, Geithner and Summers faced off last year over whether or not to fire Ken Lewis, then CEO of Bank of America. (Summers denies this.) Lewis led the ill-fated acquisition of Merrill Lynch, which saddled his bank with huge losses and necessitated three separate government bailouts. Ousting him for poor performance, as Summers wanted to do, would have been good politics (shareholder wrath finally drove Lewis out in December). But Geithner opposed this, on the grounds that the stress tests promised Bank of America the opportunity to raise private capital, and that removing Lewis prematurely would likely upset the markets, making it harder for other banks to raise money. Geithner won. “I argued,” he told me, “‘There’s a basic principle, Mr. President, which is that if, at the end of the stress tests, these guys need a huge amount of capital and they can’t raise it in the market, and we have to put it in then we will change management.’” Making an example of Lewis would be premature and indulgent. “In a crisis, you have to choose,” Geithner told me. “Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.”

Geithner plainly has no patience for what he describes as the obdurate unwillingness of colleagues to subordinate their desire for superficial impact to the larger vision. “That’s exactly the dilemma,” he said. “The stuff that seemed appealing in terms of sharp discontinuity, Old Testament justice, clean break, fix the thing, penalize the venal, would have been dramatically damaging to the basic strategy of putting out the panic, getting growth back, making people feel more confident in the future—solving it without putting trillions of dollars of the taxpayers’ money at risk unnecessarily.”

All of this is extremely interesting because of what it seems to reveal about each man: Summers, whose knock has always been that he’s an academic trapped in a world of theory, has become the politically minded one, while Geithner, the savvy realist, now evinces rigorous fealty to an idea. But it’s even more interesting for what it says about Obama. At every turn, he has sided with Geithner.

In late December, the Commerce Department reported that the economy grew at a rate of 2.2 percent in the third quarter, ending four straight quarters of decline. (That figure leapt to 5.7 percent in the fourth quarter.) Then, later that day, Obama told The Washington Post in an Oval Office interview that the most important thing he’d accomplished in his first year was “to ensure that the financial system did not collapse.” Then Geithner went on NPR and stated flatly that there would be no double-dip recession—by Washington standards of caution, a provocative move. Even with unemployment high and anger at Wall Street intense, the mood at Treasury is quietly exultant because the imminent possibility of another depression has disappeared and growth has resumed, all at a fraction of the cost estimates being bandied about last year when it still looked like the government might need to take over large banks.

Geithner likes to point out that after a year on the job, he’s spent $7 billion recapitalizing financial firms while private investors have put up $140 billion. TARP money is being repaid faster than anyone imagined, and if Obama gets the $90 billion tax on big banks he proposed in January, it could eventually be recouped. It’s likely that the cost to taxpayers will be much less than the 5 to 10 percent of GDP that the Cleveland Fed says is typical for a crisis, and possibly as little as 2 to 4 percent—about the cost of the much smaller savings-and-loan crisis of the 1980s. A recent Treasury study indicates that it could be less than 1 percent. By any reasonable standard, this would be an impressive achievement, and it would owe a great deal to Geithner’s strategy.

And yet, a year into his presidency, the overwhelming criticism of Obama is that he is taking too much control of the economy and spending too much money—which must really sting, because by avoiding nationalization and its colossal costs, he has probably saved an incredible sum. “We’re getting killed from the right and from the left on the basic strategy,” Geithner told me. “The right argues that we unnecessarily socialized the entire financial system. The left says we wasted money on things they’d have rather used to help real people directly. As you might understand, I have no sympathy with either. Neither critique is right. To the right, I would say: ‘No, the strategy we adopted was overwhelmingly designed to try to make sure that private markets came and took us out of this as quickly as possible. That was a conscious choice, a shift in strategy, and a more pro-market approach that will help us deal with our fiscal challenges.’ And to the left, I would say: ‘And that saved the taxpayer hundreds of billions of dollars that you can use to meet the main challenges we face as a country—health care, education, infrastructure, and our long-term deficit.’”

But Geithner’s achievement is appreciated in the Oval Office, where he is viewed as the architect of a successful turnaround. “Tim presented his course in a forceful way, and that’s the course the president picked,” Rahm Emanuel told me. “At the end of the day, it saved the United States taxpayer a trillion dollars.” This is why, I think, despite the public clamor for his head, Geithner came across to me as confident and brash—almost unnervingly so—even after the Republican upset in Massachusetts. If you believe, as most people in Washington do, that the economy will be the chief determinant of Obama’s political fortunes, then Geithner, by having shaped the president’s response to the crisis more than anyone else, would have to rank as Obama’s most influential adviser. This would put him right back in the familiar role he has so often inhabited in his career. One indication of this is that nobody calls it the Geithner Plan anymore—now, it’s “the president’s economic policy.”

The second of the two critical steps for the Obama administration in responding to the crisis is fixing the system, and Washington has taken it up in earnest. Geithner is at the heart of this process too, although the public has lately been led to believe that he isn’t. Last year, Geithner and Summers designed the administration’s reform plan (on which they seemed to see eye to eye), which drew healthy criticism, including Paul Volcker’s, for being soft on Wall Street. After the Massachusetts loss, Obama made a show of introducing additional “tough” new rules, bringing back Volcker to lend him credibility and endorse constraints on future bank growth and on banks’ ability to bet on risky assets like hedge funds—an episode widely interpreted as a rebuke to Geithner. For political purposes, it was. But in truth, the new measures were relatively small ones rushed forward to appease a hostile electorate. (And Obama had Geithner design them.) For better or worse, whatever Congress passes will be based on the plan Geithner and Summers drew up last year—a version of it already passed the House of Representatives in December, and will need amending to include any new rules. At this point, Obama can adjust his rhetoric to be tougher on Wall Street, but he can’t do much to adjust his plan. That die has been cast.

Last June, Treasury published a paper laying out proposals for financial reform, and then, in the fall, when everyone was absorbed in the health-care debate, took the additional step of drafting legislation—noteworthy because whoever writes the legislation also establishes the terms of debate. With the administration’s other major undertakings so far, the stimulus package and health-care reform, the White House ceded the task to Congress. But on financial reform, Congress took up the Treasury blueprint.

When Obama unveiled the plan, he called it the most sweeping set of reforms since the New Deal, which implies more than it should, because the “reforms” of the past three decades have mostly entailed dismantling regulations. A more salient assessment would weigh the reform plan against alternatives. The journalist Ronald Brownstein has likened the conceptual divide among proponents of financial reform to the one between Cold War strategists confronting the Soviet Union: one camp favors “rollback,” the other “containment.” Geithner is a containment guy to the core, and the plan reflects this.

One source of criticism is that it’s milder than the ones Geithner and his Clinton colleagues forced on Mexico, Thailand, and other emerging-market countries in the 1990s. The plan is more along the lines of the derivative reforms Geithner pursued at the New York Fed, which were intended to strengthen the system while leaving it fundamentally intact.

The Treasury reforms would impose constraints on the leverage that firms could use, so the risks they take wouldn’t be quite so extreme. They would increase, but not radically, the amount of capital that firms must hold, so that institutions could absorb greater losses before turning to the government. They would establish a clearinghouse for trading derivatives, to make the process less murky and the systemic risks more apparent. They would empower shareholders to express displeasure over how much bankers are paid, but would not limit that pay or interfere with bonuses. They would establish a Consumer Financial Protection Agency (although the prospects for congressional approval of this look dim). They would require large firms to have “living wills”—essentially, blueprints of their structure and investments—so that if they failed, the government could shut them down without sparking a panic. And they would expand oversight of the financial system, partly by investing more power in the Federal Reserve.

What they wouldn’t do is break up big banks or set size limits that would force big banks to shrink. Nor would they eliminate the possibility of future bailouts: they would in fact give Treasury new powers to intervene. They wouldn’t meaningfully penalize any of the major regulatory agencies that failed so miserably the last time around (although they would eliminate a small one). And they would do nothing so radical as reinstate the Glass-Steagall Act, which separated commercial from investment banking (Volcker has advocated doing this), or for that matter any of the other major banking regulations repealed after 1980. In other words, they wouldn’t do what most people would like them to, which is to actively reshape the financial world into something much different from the one that collapsed.

In this sense, they didn’t satisfy Rahm Emanuel’s famous declaration, “You never want a serious crisis to go to waste,” which seemed to promise reforms as ambitious as the rescue effort. The Wall Street that would exist if the administration’s reforms were put into place would be safer, saner, and more easily managed if the government had to step in. But it wouldn’t look a whole lot different than it does today, and neither would the government.

“The overarching approach of the Obama administration,” Vincent Reinhart, a former Federal Reserve official who is a scholar at the American Enterprise Institute, told me, “is to try to assess where are the market and political constraints on their range of actions, and then find solutions comfortably within those constraints. But now is the time to be a demagogue about reforming financial institutions, and they’re not investing any political capital in trying to push out those constraints. When you try so hard to preserve the existing order, you may in fact risk its long-term health.” Even the measures introduced in January would have only modest effects. The limit on bank size, for instance, would not force a single existing bank to shrink. Indeed, for all its sensible elements, what’s most striking about the administration’s plan is how thoroughly it would keep intact the two worlds Geithner knows best, Wall Street and Washington.

The reform debate is about how best to protect against the catastrophic failure of big banks. “Never again,” Obama vowed in January, “will the American taxpayer be held hostage by a bank that is too big to fail.” The debate pits one group of people who believe that big banks must be broken up, against another who believe that rules can be devised to limit the risk they pose and leave them intact. “It’s risk, not size, that matters,” Geithner told me. The main criticism of Obama’s plan is that it’s too modest about containing risk, and violates his pledge to prevent the conditions for another crisis. By leaving dangerously large institutions not only intact but emboldened by the belief that government will rescue them if they get into trouble, the critics say, he is setting the stage for exactly that. Size matters.

The administration’s most energetic critic, the MIT business professor Simon Johnson, is an outspoken member of the “rollback” crowd. Johnson’s criticism is the more notable because he happens to share with Geithner the experience of having battled emerging-market financial crises from inside the International Monetary Fund (he was chief economist several years after Geithner departed for the New York Fed).

Johnson contends that Team Obama has ignored the necessary step of breaking up the power of what he calls the “oligarchies”—the big Wall Street banks—as part of the reform process, which is what happened after the emerging-market crises. “If your banks have run themselves into the ground doing crazy things,” he told me, “you need a substantial shift in the power structure. In the ’90s view, the Geithner-Summers view, it is essential that you address that problem as part of the immediate stabilization policies.” To Johnson, as ardent a believer in regulatory capture as George Stigler ever was, it’s plain that Geithner has fallen under Wall Street’s spell, and that through him and his whole apparat, Obama has too.

Geithner disputes this, of course. “We may sometimes look like it,” he told me, “but the United States is not an emerging market.” The disagreement over reform comes down to a difference of opinion about whether the United States’ economic and financial predicament really is as bad as that of an emerging market, or whether it’s bad, but not so bad that the banks need to be broken up. Geithner convinced Obama—and Volcker has not yet convinced him otherwise—that modesty is the best policy.

What can’t be disputed is that the decision to focus on risk management rather than size carries the same political disadvantages Geithner’s plan for recovery did. By allowing Wall Street’s major institutions to continue unmolested—even as they exploit the government’s guarantee by paying themselves huge bonuses—the administration appears weak and indulgent, and deaf to the public’s desire for retribution. When Obama introduced the Volcker rules and started talking about wanting to pick a fight with Wall Street, he was at last succumbing to this pressure.

The depressing coda to all this is likely to be financial reform that falls short of even Geithner’s plan. Partly this is because the administration didn’t challenge many of the constraints that were already in place. But mostly it is because even the biggest crisis since the Great Depression hasn’t changed Washington’s ideological outlook nearly so much as it has everybody else’s. Three decades’ faith in deregulation and the power of the market makes a lasting impression. Most members of Congress have enough political sense to criticize Wall Street bankers. But meaning it enough to push tougher reforms is still regarded as slightly unsophisticated, as the handful of congressmen who’ve tried can attest.

Before passing the administration’s plan, the House weakened oversight, carved loopholes for derivatives trading, and cut commonsense measures like one requiring financial firms to offer “plain vanilla” alternatives to complicated (and profitable) products like mortgages. The Senate seems poised to weaken things further. All of this happened as a wave of anger was gathering force. When it broke, with the Republican victory in Massachusetts, it seemed to finally sweep away some long-held illusions, causing many Democrats to realize how sharply at odds their beliefs are with popular sentiment. Only now, too late, are those beliefs beginning to ebb.

The economic recovery has eased the urgency for reform that existed a year ago. Even if the administration changed course and pushed for strenuous measures, Obama and Geithner probably lack the credibility to pull them off. What successes they’ve achieved are obscured by high unemployment and anger at Wall Street, reflecting the inadequacy of their stimulus and the fallout from their recovery and reform plans. “We managed the economic recovery like we were investment bankers,” a senior adviser to Vice President Biden complains. What chance there may have been for tough reforms came early in the crisis, when public anger was peaking and banks were weak, and any such reforms probably would have required someone other than Geithner, the face of the bailouts, as their champion.

Geithner doesn’t breed nuance of opinion. You’re either for him or against him, and popular sentiment leans strongly toward the latter. But it’s possible to view him as someone who was indispensable in halting the crisis (his understanding of Wall Street’s psychology was particularly valuable) while still doubting whether someone so steeped in the institutional cultures of Washington and Wall Street has the necessary distance to direct their reform.

The angry uprising that stopped the Obama agenda in its tracks is part of the steep political cost of following the Geithner Plan—a cost that seems to keep rising, even as the fiscal cost continues to fall. Even the most prominent indicator of recovery, the robust stock market, has come to seem a curse, by reinforcing in the public mind how quickly Wall Street has recovered while everyone else is left to endure. And Obama can’t really tout all that he’s done without also drawing attention to his gentle treatment of Wall Street.

Depending on your point of view, this is either a cruel or a fitting irony. By placing his chips on Geithner a year ago, Obama was betting that a strategy of growth under any circumstances was the right move, and that devising new rules was best left to insiders. But even Geithner isn’t sure that the public will come to see it that way: “In the end, what people care about is, what did you do? Did it make things better or not? That’s what you’ll be judged by. Now, will it vindicate the president over time? It should, but I’m not sure it will. I think probably not. The country is dramatically better off today. People say the financial strategy was politically costly for us. And I say to them, relative to what? Would it have been better to have the stock market where it was in March, the economy still falling, and unemployment much higher?”

History may yet judge Obama favorably. But it's entirely conceivable that the economy could outperform everyone's expectations of a year ago and voters will still punish him and his party. And, in fact, it appears ever more likely that that's exactly what's going to happen.